Last week's deal between Freddie Mac and Norwest Mortgage, which will result in Norwest's selling nearly all its conventional loans to Freddie, caught the attention of Wall Street and fixed-income investors, who greeted the news by selling Freddie's bonds.

One Wall Street mortgage analyst said the deal translates into a "short- term negative for Freddie Mac paper" because it increases the supply of the so-called Golds securities.

"We've seen the price spreads between Golds and Fannies drop by at least a tick in the last couple of days in different coupons," the analyst said last Thursday. This is the "reverse of what Freddie Mac may have expected," he said, adding that liquidity may improve over the long term.

Thomas O'Donnell, an analyst at Salomon Smith Barney, said Norwest is likely to originate about $47 billion this year, assuming a 20% decline in volume from last year. That would increase the volume of mortgages that Freddie buys by more than $20 billion, he said.

One trader said: "The initial trade has caused Golds to cheapen up a little bit to Fannies. But on the long term it probably will have little impact." The trader noted that the supply of Fannie Mae securities has always been larger than that of Freddie Mac securities.

"We're looking at this as a long-term benefit for Freddie Mac and Golds in general," said a spokeswoman for Freddie Mac. The increased supply of Freddie's securities will have liquidity and hedging benefits, she added.

Norwest agreed to sell virtually all of its eligible loans to Freddie Mac in exchange for Freddie's agreement to let Norwest use its own system to underwrite the loans. Paul S. Reid, executive vice president of the Mortgage Bankers Association said the deal is "an improvement for the industry." He said it is "the first step of many that will lead to a complete open-architecture situation," in which other mortgage bankers and insurers could use their own systems to originate and sell loans to the GSEs.

An MBA press release said that the requirement-still in place for lenders other than Norwest-that loans be submitted through the GSEs' automated underwriting systems "has represented an unnecessary cost and exercise for our members who have developed their own automated underwriting systems."

One of Freddie Mac's hedging techniques earned kudos from the Office of Federal Housing Enterprise Oversight.

An executive summary of the regulator's proposed risk-based capital rule, released Friday, called the company's MODERNs deal last year an example of an "innovative hedging transaction."

In the April 1998 deal, Freddie brought rated derivative securities to market to offset its risk of default on $20 billion of mortgages it bought in 1996.

Last Thursday, Freddie Mac chairman Leland C. Brendsel urged the release of the risk-based capital regulation, emphasizing that Freddie was prepared for the OFHEO regulation, in part because of the MODERNs transaction.

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